Does she tie MBS with the real estate bubble and Alan Greenspan ? The origins of this(and any) crisis is always multi-dimensional. I wonder if we get overtly biased against the 'weapons of mass destruction'.[ bread & butter for many in my tribe, after all :) ]
Good point about the rating agencies. It gets curiouser and curiouser : even Obama doesn't seem to mention them in his grand plan. Some grand nexus out there!
Does she tie MBS with the real estate bubble and Alan Greenspan ? She does. After all, MBS is Mortgage Backed Security :) The link with Greenspan is slightly more tenuous. She doesn't indict him for cutting interest rates, but certainly presents the rate cutting as response to external factors (9/11, possibility of recession, focus on employment etc.).
Well, any type of credit derivative instrument is only as good as the models used to estimate the risk associated with them. CD's for MBS makes no sense, given the lack of data available for assessing the risks. On the other hand, CD's for other debt instruments are still useful. In that sense, there is no over-bias against CD's. There are some who would like to ban them all together, but that is probably overkill.
If you want to know how MBS CD's can be created much more effectively, you should take a look at "Subprime Solution" by Robert Shiller.
(Commenting here so that both H and K are notified)
Sounds like a good book! I can believe that Tett will explain things lucidly.
(J. P Morgan) did not accurately portray the risks involved in the creation and selling of MBS's
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets.
Regarding your questions.
1) Yeah, why are buyers of debts not creating new ratings agencies? Cheap things like cameras have independent reviews, and we are supposed to go by these vendor supported rating agencies to vouch for years of cash flow? I think I'm missing something. There's normally tons of money for intermediaries who connect buyers and sellers (Google, for example). So why are S&P, PwC etc not equally awesome?
[Aside: As I was typing this, I hopped over to S&P to see who pays them. I don't know the answer yet, But from their home page is linked a new white paper on Ratings Firms' Business Models: link2. I thought the raison d'
( ... )
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets. No, it's not as simple as that. JPM had tried to create mortgage backed securities, and found that it was too risky, thanks to the lack of data available to model the default risk of the instrument. They could've been a bit more open about the modeling constraints. Btw, I don't believe the contracts are out in the open for all to see. The Fed and the SEC had no idea about the contracts being created. And, no, it wasn't due to their innate governmental incompetence :)
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor.True, but then again, the market was so complex, you had contracts being re-pooled, sliced-and-diced, sold on, and then re-pooled again to pile up a mountain of debt. In those circumstances, I don't think the sellers themselves knew what they were peddling. Caveat Emptor is
( ... )
is there no mention of alan g'span and his ultra easy credit policies? is there no mention of the fact that bush era saw 'govt regulations' increase the most? does the author think that greed is inhuman?does she acknowledge that human greed is a response to incentives?.
is there no mention of alan g'span and his ultra easy credit policies? There is, but not in any sense of an indictment.
is there no mention of the fact that bush era saw 'govt regulations' increase the most? Not really. But I don't see how this is germane to MBS's - after all, most of the contracts were between two parties and not traded.
does the author think that greed is inhuman?does she acknowledge that human greed is a response to incentives?. Let me quote from my post - "At a gross level, the book is not so much about the implications and the motivations of the bankers whose rapacious greed has radically reshaped the financial system, but focused more intently on those "Financial weapons of mass destruction," credit derivatives."
Comments 6
The origins of this(and any) crisis is always multi-dimensional. I wonder if we get overtly biased against the 'weapons of mass destruction'.[ bread & butter for many in my tribe, after all :) ]
Good point about the rating agencies. It gets curiouser and curiouser : even Obama doesn't seem to mention them in his grand plan. Some grand nexus out there!
Reply
She does. After all, MBS is Mortgage Backed Security :) The link with Greenspan is slightly more tenuous. She doesn't indict him for cutting interest rates, but certainly presents the rate cutting as response to external factors (9/11, possibility of recession, focus on employment etc.).
Well, any type of credit derivative instrument is only as good as the models used to estimate the risk associated with them. CD's for MBS makes no sense, given the lack of data available for assessing the risks. On the other hand, CD's for other debt instruments are still useful. In that sense, there is no over-bias against CD's. There are some who would like to ban them all together, but that is probably overkill.
If you want to know how MBS CD's can be created much more effectively, you should take a look at "Subprime Solution" by Robert Shiller.
Reply
Sounds like a good book! I can believe that Tett will explain things lucidly.
(J. P Morgan) did not accurately portray the risks involved in the creation and selling of MBS's
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets.
Regarding your questions.
1) Yeah, why are buyers of debts not creating new ratings agencies? Cheap things like cameras have independent reviews, and we are supposed to go by these vendor supported rating agencies to vouch for years of cash flow? I think I'm missing something. There's normally tons of money for intermediaries who connect buyers and sellers (Google, for example). So why are S&P, PwC etc not equally awesome?
[Aside: As I was typing this, I hopped over to S&P to see who pays them. I don't know the answer yet, But from their home page is linked a new white paper on Ratings Firms' Business Models: link2. I thought the raison d' ( ... )
Reply
No, it's not as simple as that. JPM had tried to create mortgage backed securities, and found that it was too risky, thanks to the lack of data available to model the default risk of the instrument. They could've been a bit more open about the modeling constraints. Btw, I don't believe the contracts are out in the open for all to see. The Fed and the SEC had no idea about the contracts being created. And, no, it wasn't due to their innate governmental incompetence :)
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor.True, but then again, the market was so complex, you had contracts being re-pooled, sliced-and-diced, sold on, and then re-pooled again to pile up a mountain of debt. In those circumstances, I don't think the sellers themselves knew what they were peddling. Caveat Emptor is ( ... )
Reply
is there no mention of the fact that bush era saw 'govt regulations' increase the most?
does the author think that greed is inhuman?does she acknowledge that human greed is a response to incentives?.
Reply
There is, but not in any sense of an indictment.
is there no mention of the fact that bush era saw 'govt regulations' increase the most?
Not really. But I don't see how this is germane to MBS's - after all, most of the contracts were between two parties and not traded.
does the author think that greed is inhuman?does she acknowledge that human greed is a response to incentives?.
Let me quote from my post - "At a gross level, the book is not so much about the implications and the motivations of the bankers whose rapacious greed has radically reshaped the financial system, but focused more intently on those "Financial weapons of mass destruction," credit derivatives."
Reply
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